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Rather than software becoming commoditized, hardware will be almost free in ten years, says Microsoft chairman Bill Gates.

"Ten years out, in terms of actual hardware costs you can almost think of hardware as being free - I'm not saying it will be absolutely free - but in terms of the power of the servers, the power of the network will not be a limiting factor," he said in an interview at the Gartner Symposium in San Diego yesterday.

Gates was referring to "the magic of Moore's Law", and he has plenty of faith that it will continue to hold true. Moore's Law [PDF, 172kb] isn't a law, merely an observation made by Gordon Moore while at Fairchild Semiconductor in 1965 that "the complexity for minimum component costs has increased at a rate of roughly a factor of two per year... there is no reason to believe it will not remain nearly constant for at least 10 years." Intel is much more circumspect about the observation. It often cites physical constraints, but Moore himself says that the most important part of the observation is lower costs.

Wall Street loves the horizontal model that Intel and Microsoft pioneered because it squeezes upfront costs out of the manufacturing process. It doesn't, of course, need to account for future environmental costs, so what appears cheap today could be very expensive for us tomorrow, when we've run out of oil or are knee deep in toxic batteries. But at what point does the cost become so low that it isn't, on today's terms, that it isn't worth manufacturing?

The electronics industry's answer so far has been to add functions to existing devices - the merging of cameras and cellphones is a good example - or create new markets, while ensuring that the profit margins maintain future growth. Intel and Nokia can produce $10 chips and $30 cellphones, but can't sell enough to justify current investment levels; which is why they prefer to sell $300 chips and $200 cellphones.

For Bill, this isn't a problem. His context is that tough computing problems such as speech and handwriting recognition will eventually be solved by throwing clock cycles at them. It's a self-serving argument because it glosses over the fact that apart from Dell Computer, no hardware manufacturer is currently doing better than scraping by. As hardware prices have come down, Microsoft's share of the total cost of a PC has gone up. So speech and ink, for which Gates insists consumers should pay more, are his camera in the cellphone. The indications so far from his Tablet PC adventure are that people aren't prepared to pay extra for these features device category, although he clearly believes they will when the differential is down to around $100.

Without saying very much that is new, his long interview does emphasize one part of Microsoft's long-term strategy: it needs to convince people that it can deliver value where free software alternatives can't. On a tactical level, Microsoft has indicated it will cut prices in developing countries - such as Thailand - to compete. But it doesn't really want to go there. ®